Solid, but sideways to slower

Melanie Baker

31 August 2018

Global growth continues at a solid pace for now, supported by still accommodative monetary policy and looser US fiscal policy. However, there are more signs that growth has peaked. This is likely to be part of a gentle cooling as the business cycle matures and policy support fades in several major economies. Brexit uncertainty is likely to drag on UK growth. Recession risk looks low for now, but risks are building.

Summary

Our central case is benign: In our central case, global growth cools a bit over the next couple of years as the cycle matures in several major economies and policy support fades. Meanwhile, inflationary pressure picks up, but remains limited, avoiding any need for sharp and widespread monetary policy tightening.

Already past the peak? Several indicators suggest that we are past the recent peak of global growth: Our growth scorecard models, global purchasing managers’ indices (PMIs) and trade indicators look consistent with slower growth than at the turn of the year. Longer lead indicators like real money supply growth look consistent with a slowdown.

The probability of recession looks low for now: There are not yet many indicators suggesting growth will slow sharply. Signs of distress in response to the tighter monetary policy environment look limited for now. Meanwhile, China has eased policy and a ‘no deal’ Brexit is still a risk scenario rather than central case.

Downside risks have risen: Trade tensions are high; monetary policy is tightening; labour markets look tight, with pockets of rising domestic inflationary pressure; oil prices are up sharply versus a year ago. China is transforming its growth model, with risk of disruption to the Chinese and global economy, and Brexit approaches - the probability of the UK staying in the EU next year is small.

Global growth continues at a solid pace for now, supported by still accommodative monetary policy and looser US fiscal policy. However, there are more signs that growth has peaked. This is likely to be part of a gentle cooling as the business cycle matures and policy support fades in several major economies. Brexit uncertainty is likely to drag on UK growth. Recession risk looks low for now, but risks are building.

Summary

Our central case is benign: In our central case, global growth cools a bit over the next couple of years as the cycle matures in several major economies and policy support fades. Meanwhile, inflationary pressure picks up, but remains limited, avoiding any need for sharp and widespread monetary policy tightening.

Already past the peak? Several indicators suggest that we are past the recent peak of global growth: Our growth scorecard models, global purchasing managers’ indices (PMIs) and trade indicators look consistent with slower growth than at the turn of the year. Longer lead indicators like real money supply growth look consistent with a slowdown.

The probability of recession looks low for now: There are not yet many indicators suggesting growth will slow sharply. Signs of distress in response to the tighter monetary policy environment look limited for now. Meanwhile, China has eased policy and a ‘no deal’ Brexit is still a risk scenario rather than central case.

Downside risks have risen: Trade tensions are high; monetary policy is tightening; labour markets look tight, with pockets of rising domestic inflationary pressure; oil prices are up sharply versus a year ago. China is transforming its growth model, with risk of disruption to the Chinese and global economy, and Brexit approaches - the probability of the UK staying in the EU next year is small.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.